Pickup, C. J. O.:—This is an appeal by a son of the deceased from a Judgment pronounced by McLennan, J., in Weekly Court, on an application made to him by the executor and trustee of the last will and testament of Stella Maud Waters, deceased, to determine whether certain 3% non-cumulative redeemable preference shares of the capital stock of Dodds Medicine Company Limited (which company I shall refer to as the company) received by the executor as a stock dividend on February 19, 1951, or the redemption monies representing such part of the said shares as have been redeemed, are capital or income in the estate of the said deceased. The learned Judge in Weekly Court held that such dividend and redemption monies were capital and not income. The appellant contends that such dividend and redemption monies should have been held to be income and not capital.
Stella Maud Waters died on July 15, 1940, and by her will devised her estate to her trustees upon trust to pay income to her son and daughter for life with remainder to them in certain events, failing which the capital is to be divided into two equal shares to be held in trust for two grandsons with cross-remainders between them and an ultimate contingent remainder. Among the original assets of the estate, are 8,000 common shares of the capital stock of the company out of a total authorized capital of 30,000 shares. At the time of the events hereinafter mentioned, all of the 30,000 shares of authorized capital had been issued.
I find nothing in the will of the deceased which would determine whether the dividend or redemption monies in question would go to beneficiaries entitled to income or to beneficiaries entitled to capital, and the question involved in this appeal falls to be determined by law without any assistance from the will of the deceased.
As this question of fact depends upon the corporate acts of the company and upon them alone, it is necessary to review in some detail the corporate proceedings.
On October 19, 1950, in annual meeting of shareholders, the chairman made the following report to the meeting:
“9. The chairman stated that the directors had given consideration to the recent amendments in the Income Tax Act and felt that the company should elect to proceed under Section 95(a) of that Act to pay a 15% tax on the undistributed income of the company on hand at April 30, 1949, and also on an amount equal to the dividends paid by the company during its taxation year, which ended April 30, 1950. The undistributed income at April 30, 1949, is estimated by the company’s auditors at $248,623.58. The amount of dividends paid by the company in the year ended April 30, 1950, was $39,900, total $288,523.58. Fifteen per cent tax thereon amounts to $43,278.54, which would leave the sum of $254,245.04 in the hands of the company on which taxes would have been paid. It is suggested that $240,000 of this amount be placed in the hands of the shareholders by creating $500,000 par value preference shares in the company and issuing $240,000 par value of such shares to the present shareholders by way of stock dividend. This would mean that the present holders of the common stock of the company would receive $8 par value in preference shares for each common share now held. The company could then redeem these preference shares from time to time and the amount of the redemption price would not be taxable in the hands of the shareholders.’’
Whereupon, the shareholders passed the following resolutions:
“Upon motion duly made and seconded it was resolved that the Dodds Medicine Company Limited elects under subsection
(1) of Section 95A of the Income Tax Act to be assessed and to pay a tax on an amount equal to its undistributed income on hand at the end of the 1949 taxation year, namely April 30, 1949.
10. Upon motion duly made and seconded it was resolved that after the company has been assessed under Section 95A (1) of the Income Tax Act and has paid the tax payable under the said subsection, the directors be and they are hereby authorized from time to time to elect on behalf of the company or cause the company to elect to be assessed and to pay a tax of 15% on an amount not exceeding the aggregate of the dividends declared and paid by the company in any taxation year beginning with the 1950 taxation year and ending with the last complete taxation year before such election.
11. Upon motion duly made and seconded it was resolved that the directors and officers be authorized to proceed with such steps as may be necessary to increase the authorized capital of the company by the creation of preference shares of the company of a par value of $500,000.’’
On November 28, 1950, the directors of the company passed two by-laws, being by-laws Nos. 30 and 31, both of which were duly ratified and confirmed by the shareholders on December 11, 1950. By-law No. 30, in part, reads as follows:
“WHEREAS the authorized capital of the Dodds Medicine Company Limited (hereinafter called ‘the company’), now consists of 30,000 shares without any nominal or par value, all of which shares have been issued and are fully paid and are outstanding :
AND WHEREAS it is deemed advisable to increase the capital of the company by the creation of 500,000 non-cumu- lative non-voting preference shares of the par value of $1 per share ;
NOW THEREFORE BE IT ENACTED as a by-law of the company :
A. THAT the capital of the company be and the same is hereby increased by the creation of 500,000 non-voting preference shares of a par value of $1 each and the said preference shares shall be issued and allotted by the directors from time to time as they may determine. ’ ’
I do not quote the remainder of this by-law. It is sufficient to say that the by-law sets forth the preferences, priorities, rights, privileges, limitations and conditions applicable to the preference shares. Under these provisions contained in the by-law, the holders of preference shares were entitled to receive yearly non- cumulative preferential dividends at the rate of 3% per annum ; in the event of liquidation, bankruptcy, dissolution, winding-up or reorganization of the company, or other distribution of the assets of the company among shareholders by way of return of capital, the holders of these preference shares were entitled to receive the par value thereof, plus declared and unpaid dividends computed to date of distribution in priority to distribution of monies or assets among the holders of common shares; the preference shares were to be redeemable in whole or in part, without premium, at any time and from time to time upon notice in accordance with the redemption conditions contained in the bylaw. The company was to have the right to purchase for cancellation the whole or from time to time any part of the outstanding shares in the market or by private contract in accordance with the provisions contained in the by-law, and shares so purchased would thereupon be cancelled and could not be reissued. The by-law also authorized application to His Honour the Lieutenant-Governor of the Province of Ontario for supplementary letters patent confirming the by-law. Pursuant to this authorization, supplementary letters patent were issued on December 12, 1950 designating the previously issued 30,000 shares of the capital stock of the company as common shares and increasing the capital of the company in accordance with the terms of by-law No. 30.
By-law No. 31 need not be quoted. It simply provided that the directors might issue shares of the company as fully paid for the amount of any dividends which the directors may declare payable in money.
On January 25, 1951, there was a meeting of directors at which the chairman reported that under date of January 19, 1951, the Income Tax Department assessed the company the amount of $37,293.53 on its undistributed income of $248,623.58 under Section 95A (1) of the Income Tax Act and that the tax had been paid. The directors then passed the following resolution :
“Upon motion duly made and seconded it was resolved that the Dodds Medicine Company Limited having paid the tax payable under subsection (1) of Section 95(a) of the Income Tax Act now elects to be assessed and to pay a tax of 15% upon the sum of $39,900, being the aggregate of the dividends declared and paid by the Dodds Medicine Company Limited in the taxation year ending April 30, 1950, and that the president is hereby authorized to take such steps and execute such documents as may be necessary to give effect to this resolution.”
On February 9, 1951, the directors passed the following resolution :
“Upon motion duly made and seconded it was resolved that a stock dividend of $240,000 be and the same is hereby declared payable forthwith and that there be allotted and issued as fully paid and non-assessable 240,000 three per cent non-cumulative non-voting redeemable preference shares of the company of a par value of $1 each to the holders of the outstanding common shares of the company in proportion to the shares held by them respectively, namely at the rate of 8 of the said preference shares for each one common share standing in the name of each such holder of record as at the close of business on February 8, 1951, and that the said preference shares shall rank for all dividends payable after February 8,1951.”
It was under this resolution that the executor became entitled to and later received the stock dividend in question in these proceedings, being 64,000 non-cumulative redeemable preference shares of the capital stock of the company authorized to be issued by the by-law and supplementary letters patent already referred to. Redemption of the preference shares referred to was made in part in 1951, 1952 and 1953 and by April 1, 1953, 17,920 of the 64,000 shares issued to the executor had been redeemed. Annual dividends were paid on the preference shares outstanding from time to time, such dividends being paid on May 1, 1951, May 1, 1952 and May 1, 1953, all in accordance with the terms of the by-law under which the preference shares were issued. Since the issue of the preference shares, the balance sheet of the company has shown the issued and outstanding common and preference shares of the company on the liability side of the balance sheet.
It will be seen that by the foregoing acts of the company, the company increased its capital by the issue of preference shares; it distributed some of those preference shares, which were redeemable, among its shareholders as a stock dividend; it in no way committed itself to any future redemption of the preference shares but retained to itself the full right to decide to what extent, if at all, it would ever redeem the preference shares. So far as the company was concerned, it could leave the preference shares outstanding until the company was wound up and use the capital represented by such shares for such purposes as the company might think fit. In these circumstances, I would have thought that the acts of the company made it perfectly plain that it had capitalized that part of its undistributed surplus income represented by the preference shares which it issued as a stock dividend, and if that be so, the stock dividend received by the executor of the last will and testament of Stella Maud Waters and the redemption monies received by the executor in respect of such of those shares as were redeemed were capital and not income.
The appellant contends, however, that the decision of this Court in Re Fleck, [1952] O.W.N. 260; [1952] C.T.C. 205, which affirmed the judgment of Hogg, J.A., in Re Fleck, [1952] O.R. 113; [1952] C.T.C. 196, precludes this Court from holding, in the facts of this case, that the dividends and monies referred to were capital and not income. In my opinion, the decision of this Court in Re Fleck does not apply in the facts of this case.
I do not propose to discuss the numerous cases dealing with the question as to whether a company has, in the facts of the particular case, capitalized surplus income, as the cases are fully and ably discussed in the judgment of the learned Chief Justice of the High Court in Re McIntyre, [1953] O.R. 910; [1953] C.T.C. 372. To review them in the instant case would be to repeat much of what the learned Chief Justice said in the McIntyre case. The result of the cases, in my opinion, is that it must be decided in each case whether the company by its corporate acts so dealt with its accumulated surplus income as to irrevocably appropriate it to capital purposes of the company. I adopt the language of Hogg, J.A., in the Fleck case where he said, at p. 118 (C.T.C. atp. 202) :
“The conclusive test is whether or not the company has increased its capital in the distribution of the surplus profits.”
A company having surplus income may withhold it from distribution and use it for capital purposes without taking it into its capital structure or may withhold it from shareholders and take it into its capital structure by issuing paid up stock in lieu of a cash dividend. In the Fleck case, the corporate acts of the company show that the company did not withhold its accumulated surplus income from shareholders nor did it appropriate such income to any capital purpose. In doing what it did, the company did not, in fact, increase its capital. It did, in form, momentarily convert the surplus income into capital by issuing paid up shares by way of stock dividend, but at the same time as it declared the stock dividend it committed itself to immediate redemption of the shares. If one disregards the tax situation which, no doubt, prompted the company’s acts to take the form they did, it will be seen that what the company in reality did was to distribute its accumulated surplus income among its shareholders by channelling it through its capital account. I think all that the Fleck case holds is that, in the circumstances which I have mentioned, the monies received by the shareholders were income and not capital, within the meaning of the cases dealing with capitalization of income. The Fleck case does not, in my opinion, hold that in a case, such as the instant case, where the company in issuing shares as a stock dividend does not at the same time commit itself to immediate redemption, its acts can be considered as being anything else than capitalization of income, binding as such upon the shareholders.
The Fleck case has been considered and discussed by Judges of the High Court in a number of other Ontario cases but I do not think I need refer to such other cases except to say, with all respect to any contrary view expressed in any of such cases, that the Fleck case cannot, in my opinion, be distinguished on the ground that the company concerned was a Dominion company and not an Ontario company. The same corporate acts such as I am considering should mean the same thing in either company except to the extent that, if the interpretation of the corporate acts is doubtful, one should adopt an interpretation which is consistent with legality of action as against an interpretation which would indicate illegal action. I am not suggesting that in the Fleck case, or in any of the cases since that decision, the company was doing anything illegal. I am saying that what the company was doing in the Fleck case and in the instant case is clear. I am not considering whether what was done could legally be done or not. That is not before this Court.
Counsel argues that in a case of this kind a court can look only at form and must disregard substance and intention and that if in form the company even for a moment issued paid up shares, it capitalized the distributable income applied in payment of the shares. It is also argued that intentions do not matter, and reference is made to the words of Lord Sumner in C.I.R, v. Fisher’s Executors, [1926] A.C. 395 at p. 411, where he said:
“The only intention, that the company has, is such as is expressed in or necessarily follows from its proceedings. It is hardly a paradox to say that the form of a company’s resolutions and instruments is their substance.”
In considering this appeal, I have endeavoured to consider only the corporate acts of the company where I find both the form and substance as well as the intention of the company. I think, however, that one must look at the whole of the form and not just part of it. When one does so, it seems to me to be clear that in the Fleck case the company was not in fact capitalizing its accumulated surplus income but that in the instant case the company was.
I would, therefore, dismiss the appeal but direct that the costs of all parties to the appeal be paid out of the estate of the deceased, these of the executor and trustee as between solicitor and client.
JOHN B. AYLESWORTH, J.A.:—I agree.
J. K. MAOKEY, J.A.:—I agree.
CoLIn Gibson, J.A.:—I agree.
CHEVRIER, J.A.:—I concur.